Making informed decisions on Investment and Savings

A famous (super-rich) investor is known to have said that his biggest regret in life was that he didn’t start investing sooner. Coming from a billionaire, this sounds strange, doesn’t it?

Well, it’s true. The sooner you start investing, or saving for that matter, the more money you will make.

Key

This has to do with old faithful compound interest.

Apologies if you already know how it works; but I’m going to explain it here for those who don’t.

I’m going to use simple examples, so please bear with me. Say you start with R100. You decide to invest it in a savings account that offers 10% interest per year, with monthly compounding of interest. (As an example).

So after 1 month, you have the R100, plus 10% that you earned in interest. Therefore you have R110.

If you keep the R110, you will earn 10% on the R110 for the next month, so end up with R121, and so forth. But after a 10 years, your R100 (and remember, you didn’t add one cent to it), will have grown to a staggering R270,70. So you will have more than doubled your money, by doing nothing at all.

So you don’t just earn 10% on the initial R100, but you earn INTEREST ON INTEREST for as long as you keep the investment. Just imagine if you added R100 each month to that – you’d end up with a staggering 20,925.91!!!

Compound interest is wonderful and makes investors very happy.

Downside

Sadly the interest you PAY on debt is always higher than the interest you can EARN on savings and investments, but that’s why it is good to get out of debt and into savings as soon as you possibly can.

So which investment ‘vehicles’ are best to have? Well, this isn’t a simple question to answer. I won’t be able to tell you to invest in x or save in y – as all of these products have their own pros and cons.

What I can tell you, is that a standard savings account is a bad idea, no matter how you look at it. The interest in these accounts are shockingly low (I still don’t know why they’re called SAVINGS accounts), and you’ll never make anything by having one of these.

So what’s out there?

Let me cover the basics. For example, you get products where you invest a certain amount and you can access your money at any time. These have the benefit that you don’t have to wait, but they usually have a smaller interest rate to make up for it.

Then you get products where you invest your cash for any given time (most don’t have a limit) and you can get your money once you’ve let the bank know that you require it. An example would be a 30 Day Notice Deposit. It’s called a Notice Deposit because you have to give notice (in this case 30 days) before you can get your money out. These investments can be good, but you usually only really make money if you’ve got a big amount to invest. Some demand that you start at R10 000 or something similar.

You also get products that lock in your cash for a set time. Here you can’t access your money before the time is up. The interest on these is usually quite high, but sometimes you also need to invest a big amount. An example would be a 12 Month Fixed Deposit.

Some banks or institutions offer hybrids of these products, where you can take out a portion of your cash, while the rest remains locked in for a set period of time, to give you some leeway and peace of mind.

Shares an’ all

Then there’s another type of investment, which I’ll just say a few things about, and this would be share investing. Now share investing is investing in a part of a company on the stock exchange. You basically buy a share in that company, which helps it to grow, develop and improve – and if all goes well, you can start earning profits called dividends from that company.

If you are really new to this world, the safest investment will be an Index Tracker or ETF. This fund tracks a certain amount of the top performing companies and their success. You basically invest in this ‘collection’ and can be assured that they are the best. So your chances of ‘scoring’ can be quite high.

After you’ve learnt a bit, you can start investing in baskets of shares, which are chosen by a broker, a financial institution or the likes. They pick their favourite companies with an eye on making a profit. Then, once you REALLY know your stuff, you can start picking your own companies to invest it.

Knowledge empowers

As with all financial matters – you need to do your homework. Find out everything you need to know about the company, its financials and the industry it’s in.
Good advice is to never invest money you can’t afford to lose; and never borrow to invest. Research, research, research! And be in it for the long run – a quick buck is rare!